Rent vs Buy – The Aussie Housing Dilemma

Perhaps I’m in the lucky (unlucky?) situation, living in Perth, where house prices are around the same levels they were 10 years ago.

Now I will agree, it ain’t cheap living in the big cities of Australia. But it doesn’t have to turn into modern-day slavery either. There is a balance, and most importantly there is a choice… something the media and people often forget.

It’s the age old question that everyone asks… Is it better to rent your house or buy it?
Different people and indeed different generations, will have opposing answers to that question.

It’s a very important decision. And one which will greatly affect your ability to achieve financial freedom, in a short space of time.

Let’s dive in, and see how the two choices stack up…

Why You Should Rent

Renting is typically cheaper than owning, since rental yields in our cities are so low. (currently 3% for houses, 4% for units).
Buying a house today means a mortgage with a 4% interest rate, plus council rates, water rates, strata fees, insurance, repairs, maintenance, upgrades etc. It will easily add up to at least 5% of the value of the house each year. Plus you will be paying it off, so the weekly outgoings will be even higher, as a bit of your mortgage payment will pay down the balance. Not a bad thing, but should be considered, since it means higher weekly costs and less cashflow available for investing.

There’s more flexibility in where you live. You can move suburbs or to a different city for work, all at minimal cost. It also reduces the problem of getting stuck with bad neighbours.

No need to take on any debt. There’s no interest being paid to the bank. Some people are uncomfortable with debt, and they will naturally feel better without a mortgage. This is an advantage, especially when interest rates increase.

No capital is tied up in your house doing nothing. All your funds are going straight into investments.

It’s possible to take advantage of mispriced suburbs. (A group of expensive suburbs may have a cheaper suburb next door, with no major difference in lifestyle quality, allowing you to take advantage of living in the cheaper location).

Allows you to better manage cashflow. No sudden repair costs. Large rental increases can be managed by moving to a different location or different style of property if desired. This allows you to better maximise your savings rate at all times, especially if your needs change, such as having a family or one spouse loses their job.

Can experiment more with locations. Try living in the city, at the beach, in the country… all as a test to see what you really like. It’s the ultimate version of try-before-you-buy!

In Summary…

Renting offers the most room for optimising your cashflow, increasing your savings, and ultimately reaching financial independence as soon as possible. The numbers are usually more attractive than owning in Oz, and don’t forget, it doesn’t mean you can’t buy a house later.

What makes the numbers more compelling, is that even though interest rates are at record lows, renting is still cheaper. It’s more likely than not, interest rates will increase from here, making mortgages more expensive.

There are many success stories about young people who have shunned home ownership at a young age, in order to plough as much cash as possible into investments. I think there is a fairly strong argument for focusing on investing first. Later, once you’ve built wealth and escaped the rat race, you can buy your house outright if you so wish.

Why You Should Buy

Buying a home gives you security. You can stay as long as you like, decorate however you like and you don’t need to answer to anyone.

Having a mortgage is a good form of forced-saving. I admit some people need this, or they just don’t save anything at all. To be fair, you can also do ‘forced-investing’, where you automatically transfer some of your pay every week to be invested.

The fear of debt can be embraced here too. These folks can just pay off their mortgage ASAP, then continue with the same repayments… but put the cash into investments (like LICs or index funds) instead. I know some people who use this approach with great success.

You effectively ‘lock-in’ your house price which sets your 30 year repayments at a certain level (interest rates permitting), and you also benefit from any capital growth that occurs.

It might offer a greater level of happiness as memories are built up in the home, as you raise your family. This can be an important mental benefit for some.

You can sell the property later and pay no capital gains tax. It’s possible your property increases in price quite a lot, you can then sell it tax-free, and invest the money into dividend-paying shares. You can then move anywhere, or travel, with an attractive income stream paying all your bills.

In Summary…

Buying a home offers greater happiness and security for many. It is a lifestyle choice, and it should be treated as such. For example, buying a $1m house in Sydney is not a basic human right… it’s a lifestyle desire.

Being a home-owner can be profitable, tax-effective and offers benefits that can’t be measured in numbers. For some people, having a mortgage-free house gives immeasurable happiness.

Our Situation

I rented for a few years before I met my partner, and it has it’s good and bad points. We currently live in an average-priced mortgaged house. I love the fact we can stay as long as we want, but hate paying strata fees, council rates and water rates.

Despite the higher cost of owning, we have remained in our mortgaged house, mainly due to our room-rent situation, making it less expensive.

We’ve considered renting quite a bit in the last few years, mainly because we plan to move out further away from the city so we can have a bigger yard for veggie gardening and fruit trees. It makes sense we try out different locations we’re interested in, before we buy. This is because, if we move and buy, we’ll have to pay selling agent fees (10k minimum) and stamp duty on the new place (20k minimum), amounting to at least 30k for an average capital city property. It’s not something we want to get wrong, 30k is a gigantic amount of money!

It’s likely, by moving locations, our housing will cost around 100k less. This means extra funds will get ploughed into dividend-paying shares (LICs), strengthening our position and pumping more cashflow back to us.

We also decided, not to pay off any of our mortgages along our journey, because it was far more effective to invest the extra money, instead of paying down debt.

So for now, we’re owners, but we may well rent in a few years. Then we will figure out exactly where we want to live long term and most likely buy a house.

If I Started Over…

If we started again right now, we would either buy a low-cost house, or we would be renters.

To achieve financial independence as fast as possible, the main strategy is to reduce costs and maximise your savings rate. Since housing is such a large expense, it should definitely be the most optimised. It can literally make the difference between early retirement, and permanent wage-slave.

After we had built wealth, we could then look at buying wherever we like. Reaching financial independence gives you location freedom and there are many more lifestyle options available to you, at that point.

My approach is, always treat investing as the number one priority. Everything else comes second to that. Once you’ve built wealth through investing, you can then buy a house, even with cash!

My preferred housing strategy would be, pick a low-cost house to buy, or rent until you’re rich.

My Thoughts

There are plenty of regional places where houses are cheaper and rental yields are higher, making buying more favourable. But in general, the numbers are in favour of renting and investing, instead of owning, in my opinion.

Renting works doubly well in blue chip locations, where property is more expensive. In these areas, rental yields tend to be very low (around 2-3%). To buy these properties with a mortgage, will cost 5-6% after including all the costs like rates, strata, maintenance etc.

Essentially in these prime locations, it costs 2 to 3 times as much to live in the same property, if you want to own it.

Note: Renting is only more effective if you actually save and invest the extra cash!

We’re trying to build financial strength here, so we will not be loading ourselves up with a million-dollar mortgage on our place of residence 😉

The issue I see is, most people try and buy the most expensive house they can afford, as soon as they can. Then they’re basically stuck paying it off for the next few decades, because they have no ability to wait until they set themselves up first.

Delayed gratification is a hugely important skill in building financial strength.

Housing choice… is a choice

The aim of housing is to provide a roof over our heads, with a relatively comfortable and secure place to live. Somewhere along the lines, the goal turns into postcode status. This is just plain sad on so many levels.

You can optimise your housing by not having more rooms than you need. Does a 2 person household really need a 3-4 bedroom house?

Also, you could perhaps spend a bit extra to live closer to work, and it may save you a fortune in transport costs, if you can switch to a 1 car or car-free household.

Too many people get sucked in to thinking, if they don’t buy now, they’ll miss out forever. This is exactly what drives the mania in housing markets, like Sydney and Melbourne is experiencing right now.

Inner-Sydney is not Australia. There are plenty of lower-cost housing options out there. Just recognise, you do get a choice.

Even if you move to a lower-cost city and have to accept a lower-paying job, it’s possible that the numbers work out better than living in the high-cost city. Whatever you choose, be sure to crunch the numbers and remember to treat your personal finances like a business.

And it does make a difference!

For example: If a couple decides to spend $400 per week on housing, instead of $600 per week like their friends…what happens?

Well, assuming they invest the $200 per week savings into low-cost LICs, and get a return of 7% per annum…they’ll end up $150k richer after just 10 years!

If you decide to buy… don’t move!

I know a couple who has moved so many times, they literally have only half-a-house paid off, after almost 40 years of having a mortgage. Every time they moved, they burnt up a bit more of their equity. Sadly they thought they had done well with property over the years, since the house price got higher each time they bought and sold. It was just an illusion, because their mortgage kept increasing too. This is incredibly unfortunate. They hadn’t bothered to crunch the numbers at all, or consider whether they were actually getting any further forward or not.

Renting is considered a non-option by many, since apparently it’s dead money. But I think this is an outdated way of thinking. The numbers don’t suggest this at all! It can’t be considered any more ‘dead-money’ than interest, stamp duty and agents fees.

My main point is… just like all of our expenses, housing can be as expensive as you want it to be.

It doesn’t have to kill our chances of financial freedom. Just be reasonable about it and choose a modest place that’s not too much house for your circumstances.

The best gift you can give yourself is to be truly honest about what you need and what you want. There’s a big difference.

What it boils down to is, the numbers favour renting, but our emotions favour buying.

Whatever you choose, don’t let it affect your savings rate too much.

Most people get trapped into the work-to-pay-the-mortgage lifestyle for far too long, never focusing on investing, and never building freedom into their life.

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14 comments

Can we go back in time 2 generations and ask my grandparents to live in a regional area please. That way all my family and friends would be there and I could live in a low cost area 😉
Sydney is killer but I don’t want to leave. Definitely staying a renter for now.

Ha! Yeah that would prob be ideal 🙂
Nothing wrong with renting, can always buy later. With rental yields now so low in Syd/Melb, renting is way cheaper. And in my opinion, the people who are smart with their money will never be ‘locked out’ of the housing market!

This mentality of having to own your own home lost us a lot of money during our working years. Work and career “frequently” required us to move “unexpectedly”. So given the huge transaction costs of buying / selling a home, moves after only a couple of years of ownership generally resulted in a significant loss. Can’t believe it took us so long to learn. So strong is the brain washing of always being told when young that “rent is dead money”. In our circumstances it would have been just the opposite.

The critical thing when renting is to treat investing like paying off a mortgage so you don’t end up blowing the extra cash available from renting vs the much more expensive option of paying off a home especially in the earlier years.

In general studies have shown that a renter who is a disciplined saver can accumulate significantly more wealth over their lifetime compared to a home owner.

In fact overall I can’t say that owning homes and numerous investment property ever made us much money. It’s main benefit came from forced savings due to having the stress of a pile of debt weighing on your mind. Thank Christ for Shares as the growth in income in particular has been extraordinary.

Fully agree with your comments. It’s very common for the ‘savings’ of renting to end up getting entirely spent. A lot of people need the ‘forced saving’ aspect of it, and they can still do ‘forced investing’ if renting. It just takes some discipline to set up and to stick to it 🙂

Managing money effectively is really a mental game more than anything.

My issue with renting is always the agents, the landlords, the dealing with houses that fall apart and then getting absolutely no response from the agents who are meant to be your contact. At least not till you run out of patience 6 months later and scream at them to fix a garage door that had fallen off the hinges. Even when we had a really nice landlord, the minute he was busy, all the repairs halted and we only got a response when we hunted down his physical address and went to look for him.

Where I am in Australia, for my suburb / house price etc, it actually works out cheaper to buy for the term of the loan than to rent.

And I agree, we have a choice. To move away from your comfort zone / support network is a choice. Not a choice that many will make, but for the folks crying about high house prices, so many are also unwilling to give up the conveniences, lights and glam of the city life / inner city suburb life. I moved countries and states, and while it’s always daunting, you can always rebuild your support network of friends. (Family being in another country anyways so that takes it out of the equation for us)

Damn you must have had some bad experiences. Our tenants (unfortunately) get basically whatever they want lol.

The numbers are different for all over Australia, hence why I didn’t really have examples with numbers. Definitely some locations where buying makes more sense. Especially since the cashflow savings from renting often get spent anyway!

Haha you nailed it Pia, well said. Many expect to have it all, just as a right, because life is expensive. I call bullshit on that, life is not that expensive. Some people are genuinely struggling, but it’s not the whinging middle class we see on tv and hear all around us.

I don’t think there’s an easy answer to this one and even the experts can’t agree! Certainly, the financial side of buying our house never really featured as a consideration. That said, we did rush to pay it off as quickly as possible. But I think I have a slight obsession with security, so being in our own place and laying down roots I feel gives me the freedom to take risks in other areas of my life. Not exactly rational, but that’s the way it’s worked out for me.

Hi there, enjoying your blog. They really should teach this stuff at school! My wife and I have a large mortgage (Sydney), but feel it’s worthwhile as we expect to be here for years to come and the security of that is priceless. I also like the idea of a garden and whatnot that will be mine for the long term. You are 100% correct that it’s an emotional thing. However, I believe you missed one crucial point.

You mentioned that you lock in a price, and therefore enjoy capital growth. But you forgot that with wage growth, over time, the interest paid on your debt will be lower as a proportion of your wage (a superior measuring tool for comparison). Rent on the other hand will rise with inflation, and thus remain constant as a proportion of wage.

Another thing to consider is welfare. Whilst I plan not to ever have to rely on it, the welfare system currently rewards those who live in their own house. A GFC style event could have a large impact on a self funded retiree.

Thanks Todd. You make some very good points 🙂
It’s hard to fit everything in, the post was already pretty long!

We’re actually now renting, and enjoy it so far. We’ll see how it goes longer term.
What I meant was that you lock-in the price and therefore repayments stay the same (unless interest rates go up). Since I put it as a ‘pro’ for buying, I was implying that it’s not the case with rent. Sorry it probably wasn’t clear!

Don’t forget, the renter will be investing at a (likely) higher rate of return than home ownership, which would counter that to some extent. The rent would also reduce as a proportion of income, due to the increasing investment income the renter has.

Yes you’re right with the welfare system. It’s very geared towards the home-owner. But to be fair, the renting investor could always sell his investment portfolio down later in life to buy a house with cash, and then go on welfare at any time. I would also hope a self-funded retiree had some sort of a backup plan, like a cash buffer to smooth their dividend income. A GFC style event would effect the value of that portfolio though, if wanting to cash out. Perhaps being flexible is the best option, to be open to both avenues.

It really helped when you said that a pro to renting a home was that there was no need to take on the debt of a mortgage. When we knew we had to move, we looked into rental and purchasing options and my husband did not want to take on debt. Thank you for the information about how to prioritize renting versus buying, especially with how comfortable not having a debt with a large interest attached is.

Many people are naturally shy of debt – which is ok. There’s no law that says you must buy a house. The catch is, renters need to invest that extra cash so they end up with a pile of investments – instead of no house and no investments 🙂

Great blog and very relevant. Yours is the first one I’ve really seen where the person spruiking early retirement didn’t or isn’t on a six figure income. I’ve never been on a six figure income either and the same with my wife. I liked your post on LIC’s vs index investing.

Just a question with renting and no job. Did you find it hard to rent a place with no employment? I imagine it would be difficult to obtain a rental for a retired person living solely off investment returns.

I would also like your thoughts on mine and my wife’s current situation, which is;